Is the US no longer the safest place to invest?

After S&P downgraded the long-term credit outlook for the US, some traders are wondering whether the country is still the best place to invest

April 18, 2011

Jeffrey Sheldon Jr., left, of Knight Capital Americas uses a controller while looking at his monitor on the floor of the New York Stock Exchange, Monday, Apr. 18, 2011, in New York. Stocks are sharply lower after Standard & Poor's issued a warning on U.S. government debt. Fears about Europe's debt problems are also pushing markets lower.

Standard & Poor’s reaffirmed the U.S. ‘s AAA/ A-1+ rating. But the market still sold off sharply on the outlook downgrade. The Dow was down nearly 170 points by 11 a.m. The Nasdaq and S&P 500 were each down more than 1%.

The fear for investors is that the specter of a U.S. default could spark a double-dip recession by raising U.S. borrowing costs, making it more difficult for the U.S. to borrow and spend its way to recovery, and ultimately raising borrowing costs for banks and homeowners. U.S. ten-year treasury yields were slightly higher after Standard & Poor’s published its note Monday morning. U.S. 30-year treasuries fell a full point in response.

Standard & Poor’s argument for increasing U.S. credit risk is difficult to argue with. The U.S., S&P analysts wrote, “has relative to its ‘AAA’ peers what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us.”

U.S. Treasury Secretary Timothy Geithner has warned that the U.S. will hit its $14.29 Trillion debt ceiling by May 16 without action by the congress to raise the borrowing limit. Few would disagree that the current spending trajectory does not do much to cut the U.S.’s debt to GDP ratio.

Even if the U.S. grows 3% annually, net general government debt will reach 84% of GDP by 2013, wrote Standard & Poor’s analysts. Standard & Poor’s outlined a bearish case in which the U.S. has a mild double-dip recession next year, causing net debt to surpass 90% of GDP by 2013.

“At the very least, we are going to have to use inflation to pay off a lot of our debt,” said Christopher Whalen, a managing director at Institutional Risk Analytics. Whalen, who favors the U.S. restructuring some of its debt, plans to make his case on the Fast Money Halftime Report at 12:30PM ET.